“Bond investors have been plagued over much of the past decade by historically low returns,” Vanguard investment strategy analyst Ian Kresnak said. “And the recent sell-off was especially hard to stomach for investors nearing retirement or those already in the decumulation phase. But given the rise in interest rates, they can now reinvest cash flows in bonds with higher coupons.”
The first figure shows the brighter outlook, as a $100 investment in U.S. bonds made on December 31, 2021, has a median projected value in 10 years’ time of $122.
Aggressive interest rate hikes that began in March 2022 have dragged down bond prices, but they’ve improved the outlook for fixed income returns. Because of higher starting yields, a $100 investment in U.S. bonds made on June 30, 2023, would have a median projected value in 10 years’ time of $133, or about 9% higher.